If you have debt that's gone into collection, a note will appear on your credit report and it will negatively affect your credit score. Paying off a debt that's in collection is sometimes a good idea as far as your credit report is concerned, but it will take time to repair the damage and you should be careful how you do it.
Credit Report
If you pay off a debt that's in collection, that payment will be recorded on your credit report. But the fact that you had a debt that went into collection will remain on your report for seven years, whether you pay it or not. The fact that you finally paid the debt is not as important to your score as the fact that it went into collection in the first place. Only as the note of the default gets older in your credit history will it start to matter less.
Settlement
It's generally not a good idea to settle the debt with the original creditor for less than its full value. This may get the collection agency off your back, but it will add a new element to your credit report. The note of the settlement will make the account appear more recent and will lower your score further.
Removal
You can attempt to have the record removed from your credit report by making a deal with the debt collections agency. This doesn't always work, but it may be worth a try. Write a letter to the collections agency offering to pay the debt in full, so long as it has information regarding the account removed from your credit report. The agency has the ability to do this, but it's not always willing to enter into such an arrangement.
Obtaining a Mortgage
If you are about to apply for a mortgage or even a car loan, it's usually wise to pay off old collection accounts. Most mortgage lenders will require this as a condition of making you a loan offer, whether or not it improves your actual credit score. The same may be true if you are applying for a job as employers don't like to see such blemishes on your credit report.
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